(cross-posted from Troppo)
Interest rates in Australia have just been reduced by 0.5% in the hope that this will stimulate the economy. Will it work? Uncertain. But will politicians say it will work in the coming federal budget? Almost undoubtedly.
Perhaps displays of optimism are not such a bad thing, even if they are unwarranted.
In a study that just came out, we (myself, David Johnston at Monash and Gigi Foster at UNSW) found that optimistic expectations are key to making people happy with their lot in life. People are much less affected by regret than previously thought, nor do they tell themselves things will be bad in the future so that the present will be a pleasant surprise: people systematically over-estimate how rosy the future should be and this is crucial for their well-being.
- In a sample of over 10,000 Australians followed for 9 years (the HILDA), it turns out that people’s expected future health has about 1/6th the effect on current happiness as their actual current health, with any difference between the health that was expected and that eventuated having very little effect.
- Future imagined health was more important to Australians over 35 and to women than to men and those under 35, for whom future imagined health was not important for happiness.
- As a result, we concur with the medical literature that has long argued that hope is important in itself for health, as witnessed by the strong placebo effect. In the medical literature hope has now become the default standard for new medicines in that new medicines have to be better than placebos if they are deemed to be of real use. Our advise is also to err on the side of optimism whenever possible.
Now, to classically trained economists, the fact that hope itself is a consumption good quite apart from realised consumption may be surprising, but in the reality of economic policy the big lesson from this kind of finding has been incorporated long ago: always pretend the economy will keep going strong or will soon improve unless there are really strong indications to the contrary. Hang on to see many an overly optimistic statement in the Federal budget next week …. and rightly so.
For more information on the study, see here.